Biotech Watchers Are Starting to Wonder: How Big Is Too Big?

(Bloomberg) -- If the sky’s the limit for biotechnology valuations, some companies may be content to fly at a lower altitude.

Big numbers and private biotechnology companies go hand-in-hand these days. Case in point: Moderna Therapeutics Inc., which boasts a $7 billion price tag after it raised another $500 million in February. The Cambridge, Massachusetts-based company has high hopes for its messenger RNA technology -- though its research pipeline is still in relatively early stages.

Building up a hoard of private capital certainly confers bragging rights. But there are signs that some companies are taking less money than private investors want to put to work, at least partially out of the fear that an eventual public debut could have less pop.

A high private valuation means a company is “priced to perfection and everything has to go right,” said Daniel Klausner, capital markets advisory leader at PricewaterhouseCoopers LLP.

Once companies go public, a high private valuation can become a nerve-wracking liability in the notoriously risky biotech industry. Even the most promising research often ends in failure and stock-price declines of more than 50 percent are just another day at the office.

“It’s science, it doesn’t always co-operate,” said Klausner.

Indeed, Solid Biosciences Inc. quickly rose to a market value of over $1 billion after it went public in January, riding high hopes for its treatment for a rare form of muscular dystrophy. But its fortunes reversed weeks later when the U.S. Food and Drug Administration halted a research trial for safety reasons. The company’s market capitalization has now dwindled to roughly $381 million. As a private firm, it raised at least $93 million from investors in late financing rounds. The company didn’t disclose its valuation at the time.

A spokeswoman for Solid Biosciences Inc. declined to comment in an email.

Biotech Watchers Are Starting to Wonder: How Big Is Too Big?

While private investors can get ahead of themselves, getting in early with a promising biotech company has its rewards. When things do go right, the earliest backers typically make the most after a drug is approved or acquired by a larger company.

Take Juno Therapeutics Inc., which is near to bringing to market a drug in one of the hottest biotech niches -- a CAR-T cell-based cancer therapy. Juno went public in 2014 with a market value of roughly $3 billion. In January, the company was purchased by bigger rival Celgene Corp. for about $9 billion.

“The VCs understand that value creation and they want to get in earlier,” Klausner said. “That is causing a lot more rush to the earlier rounds.”

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